The Fed Expects More of the Same
Recently, Federal Reserve Chair Jerome Powell spoke at the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyoming. Rather than a big-picture discussion of economic trends or Fed strategy, Powell gave short remarks on the Fed’s outlook for monetary policy.
Powell emphasized the Fed’s commitment to reducing inflation, even at the cost of lower economic growth. He said restoring price stability “will likely require maintaining a restrictive policy stance for some time.” He acknowledged that this “is likely to require a sustained period of below-trend growth” and “will also bring some pain to households and businesses.” Powell argued these costs are necessary since price stability “serves as the bedrock of our economy.”
While investors seem to have taken a negative tone from Powell’s speech, his comments were mostly restatements of prior positions that reaffirmed the Fed’s current plans and goals.
Inflation will remain high
Despite Powell’s emphasis on price stability, the Federal Open Market Committee (FOMC), which sets the stance of monetary policy, expects high inflation to last for several years.
The FOMC has a long-run target of two percent inflation in the price index of personal consumption expenditure (PCE). Their most recent projections show they expect inflation to be above target for some time. The median FOMC member projects PCE inflation will exceed five percent in 2022 and will remain above two percent through 2024.
These projections seem at odds with Powell’s claim that the Fed is committed to restoring price stability. If the FOMC expects inflation to remain above their target rate for the next three years, why not enact policies that would bring it down sooner?
Interest rates will remain low
Powell said the FOMC will continue raising interest rates and that restoring price stability will require “a restrictive policy stance for some time.” However, he reiterated their projection that the July fed funds target will remain below four percent by the end of 2023.
Will interest rates below four percent be sufficient to address the highest rates of inflation in 40 years? By comparison, the FOMC led by Paul Volcker raised interest rates above 20 percent to stamp out inflation in the early 1980s.
Given that the Consumer Price Index (CPI) was basically flat in the months of July and August, the FOMC appears to be betting that inflation has peaked. That may turn out to be that case, but tighter monetary policy would bring inflation down faster rather than allowing it to persist for years to come.
Is the Fed serious?
Despite Powell’s claim that price stability is the Fed’s top priority, it appears that the FOMC is still not serious about bringing down inflation.
At his reconfirmation hearing in January, Powell said that inflation was “running very far above target” and that the economy no longer wanted or needed accommodative monetary policy, yet he discouraged the FOMC from raising interest rates at their meeting later that month. The committee was too slow in addressing the problem of high inflation. After multiple rate hikes in the past six months, they plan to take smaller steps over the next year despite their expectations of high inflation in the future.
The FOMC projects high inflation and low interest rates for years to come. Judging by their policy actions, they have not made price stability their top priority.
Thomas L. Hogan is senior research faculty at the American Institute for Economic Research. He was formerly the chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs.
